Question

I will rate!

WACC AND COST OF COMMON EQUITY Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt of 12%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2, and the current stock price is $20. a. What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations. Do not round your intermediate calculations. % b. If the firm's net income is expected to be $1.7 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.) Growth rate (1 - Payout ratio)ROE Round your answer to two decimal places at the end of the calculations. Do not round your intermediate calculations. %

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B C D 1 2. 3 4. 5 Debt ratio Equity ratio Total operating assets Debt Equity 45% 55% $11.00 billion $4.95 billion $6.05 billion 6 7 oc Before-tax cost of debt Tax rate After-tax cost of debt 12% 40% 7.20% WACC Cost of Equity 14% 19.56% 9 10 11 12 13 14 15 16 17 18 19 20 21 Expected dividend Current stock price Expected Growth rate $2.00 $20.00 9.56% a. Expected net income ROE $1.70 billion 28.10% b. Payout ratio 65.96% 22 23 24 25

Cell reference -

A B с D 1 0.45 2 3 0.55 4 Debt ratio Equity ratio Total operating assets Debt Equity 11 =C4*C2 =C4*C3 billion billion billion Before-tax cost of debt Tax rate After-tax cost of debt 5 6 7 8 9 10 11 12 13 14 15 16 0.12 0.4 =C8*(1-09) WACC Cost of Equity 0.14 =(C12-(C10*c2))/C3 Expected dividend Current stock price Expected Growth rate 2 20 =C13-C15/C16 a. 17 18 19 20 21 billion Expected net income ROE 1.7 =C19/C6 22 b. Payout ratio =1-C17/C20 23 24 25

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.